NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Using Disasters to Estimate the Impact of Uncertainty

Scott R. Baker, Nicholas Bloom, Stephen J. Terry

NBER Working Paper No. 27167
Issued in May 2020
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics

Uncertainty rises in recessions and falls in booms. But what is the causal relationship? We construct cross-country panel data on stock market levels and volatility and use natural disasters, terrorist attacks, and political shocks as instruments in regressions and VAR estimations. We find that increased volatility robustly lowers growth. We also structurally estimate a heterogeneous firms business cycle model with uncertainty and disasters and use this to analyze our empirical results. Finally, using our VAR results we estimate COVID-19 will reduce US GDP by 9% in 2020 based on the initial stock market returns and volatility response.

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Document Object Identifier (DOI): 10.3386/w27167

 
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